The returns are in and we now know that world price of a barrel of oil averaged $111 in 2011. This was up 14 percent from last year and well above the previous high of $100 set in 2008.
The average barrel of oil that we bought last year cost $15 more than the year before. Here in America, we burn about 6.7 billion barrels of the stuff each year. Therefore, our collective oil bill for 2011 was about $100 billion higher for the same amount of energy that we burned in 2010. This $100 billion created few new jobs here in the USA. Much of it went overseas and into the coffers of people who don’t like us very much.
Last year’s news was dominated by the Arab spring and its derivatives which spread from Wall Street, to Moscow, to villages in China as the revolution in communications technology coalesced in the hands of a new generation making dissidence against governments everywhere far easier to organize. By the way, the latest count of cell phones shows that in excess of 5 billion have been produced. Not all of these are still active, of course, but for a world of 7 billion people, many of whom are too young to talk much less carry a mobile phone, that is an impressive number. It is clear the world is changing in ways we cannot yet comprehend.
The peak oil story changed little last year. Global oil production hung in around 88 million barrels a day (b/d) despite the Libyan uprising which took nearly 1.6 million b/d out of production for several months. For much of last year global oil production was below consumption resulting in a gradual drawdown of world reserves. With OECD stockpiles of about 2.6 billion barrels, plus the new reserves being accumulated in China, a slight shortfall in production is not a problem for the time being.
During 2011 it became apparent that the demand for diesel is becoming a worldwide problem. While the demand for gasoline has been falling, at least in the OECD nations, the demand for diesel has been increasing. As electricity production falters around the world mainly due to droughts, aging equipment, and unaffordable fuel prices, the demand for diesel generated backup electric power has surged. Vital uses for electricity such as in hospitals, public safety, and water pumps will continue no matter what the cost. It should be noted that much of the increase in “oil” production in recent years has been made up of natural gas liquids and ethanol which are not commonly used to produce diesel, leaving the quantity of feedstock for diesel production stagnant.
The year ended with little change in the assessment for the prospects for global oil supplies. Despite all the hype concerning new oil finds and technological breakthroughs in oil production, these developments still are not contributing enough new oil to offset the annual decline of 3 million b/d from existing fields and the annual increase of circa 1 million b/d of new demand. The bottom line among those following this issue is that global oil production likely will start to decline in the next one to five years as depletion gets ahead of very-costly-to-produce new sources of “oil.”
During 2011 it became apparent that the demand for diesel is becoming a worldwide problem.
Keep in mind the phenomenon of falling net exports. As oil exporting countries grow larger and wealthier, they are consuming an increasing share of their own oil production leaving less and less to export. Most of us really don’t care how much oil in produced in the world; the real issue for most countries is how much is available that can be imported for domestic use. Jeffrey Brown, a Texas geologist and one of the leading students of net exports, notes that if you leave out the oil going to two growth powerhouses – China and India – then for the last five years the oil available for import by the rest of the importing nations has been dropping at the rate of 2.8 percent each year. Brown estimates that if current trends continue, the oil available for import by most of the world will fall by 5 to 8 percent each year for the rest of the decade.
Much of the burden of this decline in exports is falling on poorer nations, many of which are already being priced out of purchasing some of the fuel necessary to run their electric power stations. In a certain sense, oil available for import has already peaked. Note the 14 percent increase in price last year. In America, we still seem to be able to import as much as we need, but an increasing share of our refined products are now being exported as domestic consumption is falling.
From oil’s point of view, 2011 was an unusually turbulent year. Not only did we have Arab Spring which reduced oil and gas exports from several countries during the year, we also saw increasing tensions across the region which have the potential to do serious damage to oil exports in coming months. Balancing the political problems in the Middle East were the economic problems that are coming to a head in most OECD countries and possibly China as well.
How these opposing forces play out in the coming year could easily determine the course of world events for years to come. The EU could muddle along in the midst of a mild recession patching together financial arrangements as necessary to hold the Eurozone together. Alternatively many are talking about a financial collapse in the EU that could trigger a global depression and lower demand for oil.
There are so many forces at work in the Middle East it seems irresponsible to attempt to prognosticate an outcome. At best matters will bump along with only an occasional impact on oil exports. At the other end of the scale is the possibility of major hostilities, either civil or international, which could alter many of the political balances that have obtained since World War II and could easily inflict damage to the global economy on a scale not seen since the 1940’s.
Tom Whipple is a retired government analyst and has been following the peak oil issue for several years.